How Does Ethereum Work?
In the last few years, thousands of cryptocurrencies have entered the crypto market. The central theme of these digital currencies is to shun the traditional way of making payments of using banks or financial institutions. This makes the banks redundant and even the government has limited capabilities to regulate these payments.
Bitcoin was the first decentralized peer-to-peer payment system and Ethereum came along in 2017. Ethereum is intended to become more than a mere medium of exchange or a store of value. It has different features, goals, and even technology. Let’s clearly understand how does Ethereum work.
Connecting your Ethereum Blockchain Address to ZenLedger For Your Crypto Tax Forms
- To import your Ethereum Blockchain transactions into ZenLedger for your crypto tax forms, all we need is your public address.
- Select the proper blockchain or wallet from the dropdown list.
- Paste your address into the address field in ZenLedger.
- Select if the wallet is based in the USA or not.
- Then hit ADD COIN button
How Does Ethereum Work?
Like every other cryptocurrency, Ethereum runs on a blockchain network. Now, a blockchain is a distributed and decentralized public ledger where every transaction is verified first and then recorded. What does this mean? It means that everyone on the Ethereum network keeps a similar copy of the ledger, allowing the participants to see all the past transactions. Also, it is not managed by a centralized entity like a bank or a financial institution. Instead, all the distributed ledger holders manage the blockchain.
At the core of blockchain transactions is cryptography. It keeps the network safe, secure and verifies the transactions. By using computers to ‘mine’ or in other words solve complicated mathematical equations, each transaction is confirmed on the network and new blocks are added to the Ethereum blockchain. As a result, the miners or the participants are compensated with crypto tokens. For Ethereum miners, the name of the token is Ether (ETH).
Now let’s get deeper into how does Ethereum work. Mining begs one question: If miners are paid for solving complex mathematical problems, where does the token come from?
When users initiate a transaction, they pay a fee known as ‘gas.’ When a miner verifies the transaction, gas is paid to the miner. This boosts future mining and ensures network security. Also, gas functions as a limiter that restricts the number of actions a user can take per transaction.
As Ether is more of a utility token than a token of value, it is in infinite supply. It is always in circulation in miner rewards form. Theoretically, ETH will never be out of demand or inflation will never devalue the asset.
Ether has gained considerable popularity in recent years making it a go-to token for investors. However, what makes the Ethereum blockchain stand out is that users can build applications that run on blockchain similar to software that runs on a computer. These applications are capable of storing and transferring personal data or even handling complicated financial transactions. The basic computational ability of Ethereum’s network changes a medium of exchange and store of value into a global decentralized computing engine.
How To Buy Ethereum?
New investors think that they have to buy Ethereum. That’s not how Ethereum works. They have to buy Ether and use it in the Ethereum blockchain. Given how popular Ethereum is, it is relatively easy to buy ETH.
1. Choose A Cryptocurrency Exchange
There are several crypto exchanges and trading platforms such as Coinbase, Kraken, Gemini, and more present in the market that deal with several cryptocurrencies. The investors can choose an exchange of their liking, but they have to pay trading to processing fees.
2. Deposit Fiat Money
The investors have to deposit cash on the trading platform or link their debit card or bank account with the exchange to buy Ether.
3. Buy Ether
After funding the account, the investor can use the money to buy Ether. After the purchase has been made, the investor can hold the tokens, exchange them for other tokens, or sell them. However, it is important to note that transactions may incur taxes.
4. Use A Wallet
ETH could be stored in the trading platform’s wallet but it runs the risk of security. The platform could be hacked and the tokens might get stolen. To keep ETH safe, the investors can choose another digital wallet or a cold wallet, which is not connected to the internet.
Investors should consider buying Ethereum for three main reasons. First, it can be used as a virtual currency. Second, It will substantially improve when it gets updated and shifts to the new protocol. Finally, as developers use Ethereum distributed apps, the demand for them may increase.
Along with buying Ether, investors can also invest in companies that are developing apps in the Ethereum network. So, how does Ethereum work? It works on a blockchain network. Developers build apps on the network and it is a place where a transaction is verified first and then recorded.